2

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE 1- DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

 

Business

 

Argan, Inc. (AI or the Company) conducts its operations through its wholly owned subsidiaries, Gemma Power Systems, LLC and affiliates (GPS) which was acquired in December 2006, Vitarich Laboratories, Inc. (VLI) which was acquired in August 2004, and Southern Maryland Cable, Inc. (SMC) which was acquired in July 2003. Through GPS, the Company provides a full range of development, consulting, engineering, procurement, construction, commissioning, operating and maintenance services to the power energy market for a wide range of customers including public utilities, independent power project owners, municipalities, public institutions and private industry. Through VLI, the Company develops, manufactures and distributes premium nutritional supplements, whole-food dietary supplements and personal care products. Through SMC, the Company provides telecommunications infrastructure services including project management, construction and maintenance to the Federal Government, telecommunications and broadband service providers, as well as to electric utilities primarily in the Mid-Atlantic region.

AI operates in three reportable segments.

 

Basis of presentation

 

The condensed consolidated balance sheet as of October 31, 2007, the condensed consolidated statements of operations for the three and nine months ended October 31, 2007 and 2006, and the condensed consolidated statements of cash flows for the nine months ended October 31, 2007 and 2006 are unaudited. In the opinion of management, the accompanying financial statements contain all adjustments, which are of a normal and recurring nature, considered necessary to present fairly the financial position of the Company as of October 31, 2007 and the results of its operations and its cash flows for the interim periods presented. The Company prepares its interim financial information using the same accounting principles as it does for its annual financial statements.

 

These financial statements do not include all disclosures associated with annual financial statements and, accordingly, should be read in conjunction with the footnotes contained in the Company’s consolidated financial statements for the year ended January 31, 2007, together with the independent registered public accounting firm’s report, included in the Company’s Annual Report on Form 10-KSB, as filed with the Securities and Exchange Commission (SEC). The results of operations for any interim period are not necessarily indicative of the results of operations for any other interim period or for a full fiscal year.

 

NOTE 2 - RECENT ACCOUNTING STANDARDS

 

In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“FAS”) No. 141(R), “Business Combinations”. FAS No. 141(R) replaces FAS No. 141 and provides greater consistency in the accounting and financial reporting of business combinations. FAS No. 141(R) requires the acquiring entity in a business combination to recognize all assets acquired and liabilities assumed in the transaction, establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed, establishes principles and requirements for how an acquirer recognizes and measures any non-controlling interest in the acquiree and the goodwill acquired, and requires the acquirer to disclose the nature and financial effect of the business combination. Among other changes, this statement also required that “negative goodwill” be recognized in earnings as a gain attributable to the acquisition, that acquisition-related costs are to be recognized separately from the acquisition and expensed as incurred and that any deferred tax benefits resulted in a business combination are recognized in income from continuing operations in the period of the combination. FAS 141R is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company will assess the impact that SFAS 141R may have on its financial position and results of operations.

In February 2007, the FASB issued FAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” FAS No. 159 permits companies to measure many financial instruments and certain other items at fair value at specified election dates. The provisions of FAS No. 159 will be effective for the Company beginning February 1, 2008. The Company does not expect FAS No. 159 to have a significant impact on the consolidated financial statements.

In September 2006, the FASB issued Statement of Financial Accounting Standard No. 157, “Fair Value Measurements.” This Standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. The Company plans to adopt FAS No. 157 on February 1, 2008, as required. The adoption of FAS No. 157 is not expected to have a material impact on the Company’s financial condition and results of operations.

6

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NOTE 3 - ESTIMATED LOSS ON UNCOMPLETED CONTRACTS

 

		2007			2006
Computed expected income tax benefit		$	471,000		$	214,000
Increase (decrease) resulting from:
State income taxes, net			(386,000	)		(107,000	)
Permanent differences			(1,338,000	)		95,000
		$	(1,253,000	)	$	202,000

The Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109” (“FIN 48”), on February 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement 109, “Accounting for Income Taxes,” and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company has concluded that there is no material effect as a result of adopting this standard.

 

The Company is subject to income taxes in the U.S. federal jurisdiction and various state jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. With few exceptions, the Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for the years before 2003.

 

NOTE 9 - STOCK BASED COMPENSATION

 

The Company has a stock option plan which was established in August 2001 (the “Plan”). Under the Plan, the Company’s Board of Directors may grant stock options to officers, directors and key employees. In June 2007, the shareholders of the Company voted to amend the Plan to authorize the grant of options for up to 650,000 shares of the Company’s common stock.

 

Stock options granted may be “Incentive Stock Options” (“ISOs”) or “Nonqualified Stock Options” (NSOs”). ISOs have an exercise price at least equal to the stock’s fair market value at the date of grant, a ten year term and vest and become fully exercisable one year from the date of grant. NSOs may be granted at an exercise price equal to the stock’s fair market value at the date of grant or at a price other than the stock’s fair market value at the date of grant and have up to a ten year term, and vest and become fully exercisable as determined by the Board.

 

Options		Shares			Weighted- Average Exercise Price			Weighted- Average Remaining Contract Term (Years)			Aggregate Intrinsic Value
Outstanding at January 31, 2007			244,000		$	4.20
Granted			142,000		$	7.05
Exercised			(10,000	)		2.65
Forfeited or expired			(3,000	)	$	6.32
Outstanding at October 31, 2007			373,000		$	5.30			6.5		$	1,150,000
Exercisable at October 31, 2007			215,000		$	4.11			7.4		$	397,000

 

The per share weighted average grant date fair values of options awarded during the nine months ended October 31, 2007 and 2006 were $4.90 and $1.34, respectively. At October 31, 2007, there was approximately $450,000 unrecognized compensation cost related to stock options granted under the Plan. The end of the period over which the compensation expense for these awards is expected to be recognized is October 2008.

 

A summary of the status of the Company’s nonvested shares as of October 31, 2007, and changes during the nine months then ended, is presented below:

		Shares			Aggregate Intrinsic Value
Nonvested at January 31, 2007			16,000
Granted			142,000
Vested			—
Forfeited			—
Nonvested at October 31, 2007			158,000		$	753,000

 

The fair value of nonvested shares is determined using the Black-Scholes option-pricing model based on the excess of the opening trading price of the Company’s shares on the grant date in excess of exercise price.

 

In connection with the Company’s private placement in April 2003, the Company issued warrants to purchase shares of the Company’s common stock at a price of $7.75 per share with a ten year term. 180,000 of the warrants were granted to three individuals who became the executive officers of the Company upon completion of the offering. In addition, MSR Advisors, Inc. (MSR) received warrants to purchase 50,000 shares of the Company’s stock. A director of the Company is the Chief Executive Officer of MSR. The fair value of the warrants of $849,000 was recognized as offering costs. All warrants are exercisable.

 

At October 31, 2007, there were 864,000 shares of the Company’s common stock available for issuance upon the exercise of stock options and warrants, including 261,000 shares of the Company’s common stock available for award under the Plan.

 

NOTE 10 - LOSS PER SHARE

 

Basic and diluted net loss per share information is presented in accordance with SFAS No. 128, “Earnings Per Share.” Basic loss per share is calculated by dividing the net loss by the weighted average number of common shares outstanding for the applicable period. Common stock equivalents, including stock options and warrants, are not considered because the effect of their inclusion would be anti-dilutive.

  

NOTE 11 - SEGMENT REPORTING

 

The Company has three reportable operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and assessing performance.

 

10

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The Company’s three reportable segments are power industry services, telecom infrastructure services and nutraceutical products. The Company conducts its operations through its wholly owned subsidiaries - GPS, VLI and SMC. The “Other” column includes the Company’s corporate and unallocated expenses.

 

The Company’s operating segments are organized in separate business units with different management, customers, technology and services. The respective segments account for the respective businesses using the accounting policies in Note 2 to the Company’s Annual Report on Form 10-KSB for the fiscal year ended January 31, 2007.

 

The following information is for the three months ended October 31, 2007, except for total assets and goodwill which is as of October 31, 2007:

 

		Power Industry Services			Nutraceutical Products			Telecom Infrastructure Services			Other			Consolidated
Net sales		$	42,017,000		$	4,617,000		$	2,629,000			—		$	49,263,000
Cost of sales			35,548,000			4,193,000			2,076,000			—			41,817,000
Gross profit			6,469,000			424,000			553,000			—			7,446,000
Selling, general and administrative expenses			1,892,000			1,047,000			346,000			1,096,000			4,381,000
Impairment of goodwill and other intangible assets			—			4,666,000			—			—			4,666,000
Income (loss) from operations			4,577,000			(5,289,000	)		207,000			(1,096,000	)		(1,601,000	)
Interest expense			(145,000	)		(26,000	)		—			—			(171,000	)
Interest income			1,067,000			—			—			7,000			1,074,000
Income (loss) before income taxes		$	5,499,000		$	(5,315,000	)	$	207,000		$	(1,089,000	)		(698,000	)
Income tax expense															(1,259,000	)
Net loss														$	(1,957,000	)
Depreciation and amortization		$	45,000		$	140,000		$	135,000		$	4,000		$	324,000
Amortization of intangibles		$	947,000		$	228,000		$	26,000		$	—		$	1,201,000
Goodwill		$	16,476,000		$	2,739,000		$	940,000		$	—		$	20,155,000
Total assets		$	124,193,000		$	9,909,000		$	4,896,000		$	14,799,000		$	153,797,000
Fixed asset additions		$	31,000		$	88,000		$	164,000		$	—		$	283,000

 

11

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The following information is for the nine months ended October 31, 2007:

 

		Power Industry Services			Nutraceutical Products			Telecom Infrastructure Services			Other			Consolidated
Net sales		$	130,970,000		$	14,602,000		$	7,260,000		$	—		$	152,832,000
Cost of sales			119,383,000			12,481,000			5,776,000			—			137,640,000
Gross profit			11,587,000			2,121,000			1,484,000			—			15,192,000
Selling, general and administrative expenses			6,998,000			3,231,000			1,044,000			2,442,000			13,715,000
Impairment of goodwill and intangible assets			—			4,666,000			—			—			4,666,000
Income (loss) from operations			4,589,000			(5,776,000	)		440,000			(2,442,000	)		(3,189,000	)
Interest expense			(461,000	)		(88,000	)		(1,000	)		—			(550,000	)
Interest income			2,343,000			—			—			9,000			2,352,000
Income (loss) before income taxes		$	6,471,000		$	(5,864,000	)	$	439,000		$	(2,433,000	)		(1,387,000	)
Income tax expense															(1,253,000	)
Net loss														$	(2,640,000	)
Depreciation and amortization		$	139,000		$	434,000		$	383,000		$	12,000		$	968,000
Amortization of intangibles		$	4,375,000		$	837,000		$	78,000		$	—		$	5,290,000
Fixed asset additions		$	35,000		$	212,000		$	260,000		$	—		$	507,000

 

The following information is for the three months ended October 31, 2006, except for total assets and goodwill which is as of October 31, 2006:

		Nutraceutical Products			Telecom Infrastructure Services			Other			Consolidated
Net sales		$	5,248,000		$	4,361,000		$	—		$	9,609,000
Cost of sales			4,235,000			3,506,000			—			7,741,000
Gross profit			1,013,000			855,000			—			1,868,000
Selling, general and administrative expenses			1,178,000			411,000			625,000			2,214,000
Income (loss) from operations			(165,000	)		444,000			(625,000	)		(346,000	)
Interest expense and amortization of subordinated debt issuance  costs			(79,000	)		(12,000	)		4,000			(87,000	)
Other income, net			—			2,000			—			2,000
Income (loss) before income taxes		$	(244,000	)	$	434,000		$	(621,000	)		(431,000	)
Income tax benefit												176,000
Net loss											$	(255,000	)
Depreciation and amortization		$	146,000		$	121,000		$	12,000		$	279,000
Amortization of intangibles		$	305,000		$	26,000		$	—		$	331,000
Goodwill		$	6,565,000		$	940,000		$	—		$	7,505,000
Total assets		$	16,200,000		$	6,439,000		$	468,000		$	23,107,000
Fixed asset additions		$	92,000		$	74,000		$	—		$	166,000

 

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The following information is for the nine months ended October 31, 2006:

 

		Nutraceutical Products			Telecom Infrastructure Services			Other			Consolidated
Net sales		$	16,288,000		$	10,843,000		$	—		$	27,131,000
Cost of sales			12,561,000			8,507,000			—			21,068,000
Gross profit			3,727,000			2,336,000			—			6,063,000
Selling, general and administrative expenses			3,335,000			1,249,000			1,550,000			6,134,000
Income (loss) from operations			392,000			1,087,000			(1,550,000	)		(71,000	)
Interest expense and amortization of subordinated debt issuance costs			(287,000	)		(41,000	)		(236,000	)		(564,000	)
Other income, net			—			5,000			—			5,000
Income (loss) before income taxes		$	105,000		$	1,051,000		$	(1,786,000	)		(630,000	)
Income tax benefit												202,000
Net loss											$	(428,000	)
Depreciation and amortization		$	419,000		$	351,000		$	284,000		$	1,054,000
Amortization of intangibles		$	914,000		$	77,000		$	—		$	991,000
Fixed asset additions		$	281,000		$	489,000		$	8,000		$	778,000

 

NOTE 12 - CONTINGENCIES

 

On March 22, 2005, WFC filed a civil action against the Company, and its executive officers. The suit was filed in the Superior Court of the State of California for the County of Los Angeles. WFC purchased the capital stock of the Company's wholly owned subsidiary, Puroflow Incorporated, pursuant to the terms of the Stock Purchase Agreement dated October 31, 2003. WFC alleged that the Company and its executive officers breached the Stock Purchase Agreement between WFC and the Company and engaged in misrepresentations and negligent conduct with respect to the Stock Purchase Agreement. WFC sought declaratory relief, compensatory and punitive damages in an amount to be proven at trial as well as the recovery of attorney's fees. This action was removed to the United States District Court for the Central District of California. The Company and its officers deny that any breach of contract or that any misrepresentations or negligence occurred on their part.

 

On March 15, 2007, the District Court granted the Company and its executive officers' motion for summary judgment, thereby dismissing WFC's lawsuit against the Company and its executive officers in its entirety. WFC appealed the District Court’s decision. The parties have filed their appellate briefs and are waiting for a date to be scheduled for oral argument. The Company intends to vigorously defend the appeal and this litigation.

 

Although the Company has reviewed WFC’s claims and believes that they are without merit, the Company has recorded an accrual of approximately $56,000 and $286,000 at October 31, 2007 and January 31, 2007, respectfully, for subsequent legal services and estimated legal fees related to potential ongoing legal costs of the WFC litigation that it considers to be probable and that can be reasonably estimated. It is possible however, that the ultimate resolution of the WFC litigation could result in a material adverse effect on the results of operations of the Company for a particular future reporting period.

 

On August 27, 2007, Kevin Thomas filed a lawsuit against the Company, VLI and the Company’s Chief Executive Officer (the “CEO”) in the Circuit Court of Florida. Thomas was the former owner of VLI. The Company acquired VLI by way of merger on August 31, 2004. Thomas alleges the Company, VLI and the CEO breached various agreements regarding his compensation and employment package that arose from the acquisition of VLI. Thomas has alleged contractual and tort-based claims arising from his compensation and employment agreements and seeks rescission of his covenant not to compete against VLI. The Company, VLI and the CEO deny that any breach of contract or tortious conduct occurred on their part. The Company has also asserted three counterclaims against Thomas for breach of contract, breach of fiduciary duty and tortious interference with contractual relations for the violation of his non-solicitation, confidentiality and non-compete obligations. The Company intends to vigorously defend this lawsuit and prosecute its counterclaims.

 

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Although the Company has reviewed Thomas’ claims and believes that they are without merit, the Company has recorded an accrual of approximately $320,000 at October 31, 2007 for subsequent legal services and estimated legal fees related to potential ongoing legal costs of the Thomas litigation that it considers to be probable and that can be reasonably estimated. It is possible however, that the ultimate resolution of the Thomas litigation could result in a material adverse effect on the results of operations of the Company for a particular future reporting period.

In the normal course of business, the Company has pending claims and legal proceedings. It is the opinion of the Company’s management, based on information available at this time, that none of the other current claims and proceedings will have a material effect on the Company’s consolidated financial statements.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion summarizes the financial position of Argan, Inc. and its subsidiaries as of October 31, 2007, and the results of operations for the three and nine months ended October 31, 2007 and 2006, and should be read in conjunction with (i) the unaudited condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q and (ii) the consolidated financial statements and accompanying notes to our Annual Report on Form 10-KSB for the fiscal year ended January 31, 2007 filed with the Securities and Exchange Commission on April 26, 2007.

Cautionary Statement Regarding Forward Looking Statements

 

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for certain forward-looking statements. We have made statements in this Quarterly Report on Form 10-Q that may constitute “forward-looking statements”. The words “believe,” “expect,” “anticipate,” “plan,” “intend,” “foresee,” “should,” “would,” “could,” or other similar expressions are intended to identify forward-looking statements. These forward-looking statements are based on our current expectations and beliefs concerning future developments and their potential effects on us. There can be no assurance that future developments affecting us will be those that we anticipate. All comments concerning our expectations for future revenues and operating results are based on our forecasts for our existing operations and do not include the potential impact of any future acquisitions. These forward-looking statements involve significant risks and uncertainties (some of which are beyond our control) and assumptions. They are subject to change based upon various factors, including but not limited to the risks and uncertainties summarized below:

	·		cyclical changes in demand for our products and services;
	·		cyclical nature of the individual markets in which our customers operate;
	·		that the dollar amount of our backlog, as stated at any given time, is not indicative of our future earnings;
	·		delays or difficulties related to our projects including additional costs, reductions in revenues or the payment of liquidated damages;
	·		the effect of our percentage-of-completion accounting policies;
	·		changes in the estimates and assumptions we use to prepare our financial statements;
	·		our ability to obtain surety bonds or other means of credit support for projects;
	·		our ability to obtain waivers or amendments with our lenders or sureties, or to collateralize letters of credit or surety bonds upon non-compliance with covenants in our Credit Facility or surety indemnity agreements;
	·		compliance with certain debt covenants, which as a result, may interfere with our ability to successfully execute our business plan;
	·		our indebtedness, which could adversely affect our financial condition and impair our ability to fulfill our obligations under our financing arrangements;
	·		various legal, regulatory and litigation risk including but not limited to, class action lawsuits, regulatory activities and associated periodic reviews of the SEC and Public Company Accounting Oversight Board;

 

	·		the nature of our contracts, particularly fixed-price contracts;
	·		the failure to meet schedule or performance requirements of our contracts;

 

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	·		our dependence on subcontractors;
	·		possible cost escalation associated with our fixed-price contracts;
	·		our ability to obtain new contracts for large-scale projects and the timing of the performance of these contracts;

 

	·		the effect of our reputation and financial exposure due to the failure of our partners to perform their contractual obligations;
	·		delays and/or defaults in customer payments;

 

·

potential professional liability, product liability, warranty and other potential claims, which may not be covered by insurance;

 

	·		the presence of competitors with greater financial resources and the impact of competitive products, services and pricing;
	·		work stoppages and other labor problems;
	·		our liquidity position;
	·		a determination to write-off a significant amount of our intangible assets;
	·		our ability to successfully identify, integrate and complete acquisitions;
	·		our failure to attract and retain qualified personnel;
	·		our ability to retain key members of our management;
	·		our competitors’ ability to develop or otherwise acquire equivalent or superior technology;
	·		general economic conditions;
	·		future changes in accounting standards or interpretations;
	·		inability to maintain an effective system of internal control, which could result in inaccurate reporting of our financial results or an inability to prevent fraud;
	·		provisions in our articles of incorporation and by-laws and rights agreement could make it more difficult to acquire us and may reduce the market price of our common stock;
	·		changes in the U.S. economy and global markets as a result of terrorists’ actions;
	·		increases in employee-related costs and expenses including healthcare and other employee benefits such as unemployment insurance and workers’ compensation; and
	·		our dependency on technology in our operations and the possible impact of system and information technology interruptions.

Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in the forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. For a more detailed discussion of some of the foregoing risk and uncertainties, see “Item 1 — Description of Business — Risk Factors” in our Annual Report on Form 10-KSB as filed with the Securities and Exchange Commission on April 26, 2007, as well as the other reports and registration statements filed by us with the SEC and under “Forward Looking Statements” on our website. These documents are available free of charge from the SEC or from our corporate headquarters. Our annual, quarterly, and current reports and amendments thereto, filed with the SEC are available on our website. For more information about us and the announcements we make from time to time, visit our website at www.arganinc.com .

 

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GENERAL

 

Argan, Inc. (the “Company,” “we,” “us,” or “our”) conducts operations through our wholly owned subsidiaries, Gemma Power Systems, LLC and affiliates (“GPS”) that we acquired in December 2006, Vitarich Laboratories, Inc. (“VLI”) that we acquired in August 2004, and Southern Maryland Cable, Inc. (“SMC”) that we acquired in July 2003. Through GPS, we provide a full range of development, consulting, engineering, procurement, construction, commissioning, operations and maintenance services to the energy market for a wide range of customers including public utilities, independent power project owners, municipalities, public institutions and private industry. Through SMC, we provide telecommunications infrastructure services including project management, construction and maintenance to the Federal Government, telecommunications and broadband service providers as well as electric utilities. Through VLI, we develop, manufacture and distribute premium nutritional products.

		Nine Months Ended October 31,
		2007			2006
Computed “expected” tax (expense) benefit		$	471,000		$	214,000
Increase (decrease) resulting from:
State income taxes, net			(386,000	)		(107,000	)
Permanent differences			(1,338,000	)		95,000
		$	(1,253,000	)	$	202,000

CONSOLIDATED RESULTS OF OPERATIONS COMPARED TO PRO FORMA RESULTS

The following analysis summarizes the results of our operations for three and nine months ended October 31, 2007 compared to unaudited pro forma results of operations for the corresponding periods of the prior year as if the acquisition of GPS and related transactions, including the new bank financing of $8.0 million and the private offering of 2,853,335 shares, were completed on February 1, 2006.

 

The unaudited pro forma statement of operations does not purport to be indicative of the results that would have actually been obtained if the acquisition of GPS had occurred on February 1, 2006, or that may be obtained in the future. GPS previously reported its results of operations using a calendar year-end. No material events occurred subsequent to these reporting periods that would require adjustment to our unaudited pro forma statements of operations. The acquisition of GPS had no impact on the previously reported amounts for our nutraceutical products and telecom infrastructure services segments.

		Three Months Ended October 31,						Nine Months Ended October 31,
		2007			2006			2007			2006
Net sales
Power industry services		$	42,017,000		$	37,158,000		$	130,970,000		$	74,785,000
Nutraceutical products			4,617,000			5,248,000			14,602,000			16,288,000
Telecom infrastructure services			2,629,000			4,361,000			7,260,000			10,843,000
Net sales			49,263,000			46,767,000			152,832,000			101,916,000
Cost of sales
Power industry services			35,548,000			34,313,000			119,383,000			69,542,000
Nutraceutical products			4,193,000			4,235,000			12,481,000			12,561,000
Telecom infrastructure services			2,076,000			3,506,000			5,776,000			8,507,000
Cost of sales			41,817,000			42,054,000			137,640,000			90,610,000
Gross profit			7,446,000			4,713,000			15,192,000			11,306,000
Selling and general and administrative expenses			4,381,000			4,102,000			13,715,000			9,471,000
Impairment of goodwill and intangible assets			4,666,000			—			4,666,000			—
Income (loss) from operations		$	(1,601,000	)	$	611,000		$	(3,189,000	)	$	1,835,000

 

The reductions in the net sales of nutraceutical products and telecommunication infrastructure services between periods are discussed above.

 

Cost of Sales

 

For the three months ended October 31, 2007, the cost of revenues for power industry services was approximately $35.5 million, or 84.6% of corresponding net revenues, compared to pro forma cost of revenues of approximately $34.3 million, or 92.3% of corresponding pro forma net revenues for the three months ended October 31, 2006. For the nine months ended October 31, 2007, the cost of revenues for power industry services was approximately $119.4 million, or 91.2% of corresponding net revenues, compared to pro forma cost of revenues of approximately $69.5 million, or 93.0% of corresponding pro forma net revenues for the nine months ended October 31, 2006. The increase in the level of construction activity by GPS is the reason for the increase in the cost of revenue amounts between years. The profitable performance of services on the Company’s other GPS construction projects underway during the current fiscal year more than offset the losses of approximately $2.3 million and $11.6 million incurred on a GPS project in the three and nine months ended October 31, 2007, respectively..

The reductions in the cost of sales of nutraceutical products and telecommunication infrastructure services between periods are discussed above.  

Selling, General and Administrative Expenses

 

For the three months ended October 31, 2007, selling, general and administrative expenses were approximately $4.4 million, or 8.9% of consolidated net sales, compared to the pro forma amount of approximately $4.1 million for the three months ended October 31, 2006, or 8.8% of consolidated pro forma net sales.

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of disclosure controls and procedures. Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of October 31, 2007. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of October 31, 2007, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

 

Changes in internal controls. No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended October 31, 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II

 

OTHER INFORMATION

ITEM 1A.  RISK FACTORS

 

Our Annual Report on Form 10-KSB for the year ended January 31, 2007, under Item 1 Description of Business, Risk Factors includes a detailed discussion of our risk factors. There have been no material revisions to the Risk Factors as filed in our Annual Report Form 10-KSB for the year ended January 31, 2007.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

Exhibit No.		Title
Exhibit: 31.1		Certification of Chief Executive Officer, pursuant to Rule 13a-14(c) under the Securities Exchange Act of 1934
Exhibit: 31.2		Certification of Chief Financial Officer, pursuant to Rule 13a-14(c) under the Securities Exchange Act of 1934
Exhibit: 32.1		Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350
Exhibit: 32.2		Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto, duly authorized.

	ARGAN, INC.
December 17, 2007	By:	/s/ Rainer Bosselmann
		Rainer Bosselmann
		Chairman of the Board and Chief Executive Officer

 

December 17, 2007	By:	/s/ Arthur F. Trudel
		Arthur F. Trudel
		Senior Vice President, Chief Financial Officer and Secretary

 

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